May 04, 2012 02:33 PM IST | Source:

Hold TCS; target Rs 1270: Way2Wealth

Way2Wealth has recommended hold rating on Tata Consultancy Services (TCS) with target price of Rs 1270, in its April 27, 2012 research report.

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Way2Wealth has recommended hold rating on Tata Consultancy Services (TCS) with target price of Rs 1270, in its April 27, 2012 research report.

"TCS in Q4FY12 reported a healthy all round growth in both topline and bottomline in an environment where future growth prospect of Indian IT was in question due to muted performance and guidance given by Infosys. The company’s USD term revenue grew by 2.41% sequentially to $2647mn against our expectation of $2612mn. Volume growth was 3.26% sequentially and average realization was down by 85bps mainly due to cross currency and change in business mix. For the full year of FY12, TCS’s USD term revenue crossed $10bn mark and registered a growth of whopping 24.24% backed by 23.00% of volume growth and 1.24% of realization improvement.”

“Operating margin dipped by 156bps sequentially mainly due to lower utilization and INR appreciation against USD. The company paid 100% variable bonus to the performer employees and that also put some pressure on margins. Higher hedging position saved aid TCS to book forex gain in a INR appreciating environment and hence net margin improved by 26bps sequentially. BFSI Weak; But Management Articulated Confidence About Future Performance.”

“BFSI vertical, in a very tough times, was little muted in the previous quarter but reported much better performance as compared to peers (Infosys: BFSI- -4.72%, HCL: BFSI- -2.72%). This shows TCS’s strong execution capability to penetrate and mine the customers in this space through services, like, ADM and BPO. Moreover, unlike competitors TCS management articulated very strong confidence about the segments performance in the near to medium term mainly backed by higher regulatory related spending and vendor consolidation. TCS also won 3 large deals in the BFSI space in the forth quarter. Among the other verticals, growth is equally distributed between retail, manufacturing, hi-tech and travel & transport. Telecom, after two consecutive quarters of negative growth, surprisingly registered 2.41% sequential improvement in Q4FY12.”

“TCS won 6 large deals in Q4FY12 and among that 3 is in BFSI space, 2 in retail and 1 in telecom. Although, deal wins are little muted compared to the previous few quarters mainly due to seasonality, we believe, TCS has very strong order book position and that give enough visibility and assurance about the near to medium term growth prospect. TCS hired more than 19000 employees in the forth quarter and for full year of FY12, the company’s gross employee addition was 70400 people on the top of 69700 added in FY11. Although, utilization was under pressure (80.64% in Q4 against 82.08% in Q3) due to huge denominator increase during the quarter. The company offered 6-8% salary hike to the offshore employees and 2-4% hike to onsite employees also paid 100% of variable performance bonus to the performers (against 70% by Infosys). We believe, this comparatively better wage hike and higher bonus pay would help to control attrition further which  is already low compared to peers.”

“TCS is expected to maintain its industry leading growth in near to medium term backed by its strong order pipeline and recent big deal wins. We believe USD term revenue would grow by 16% to $11723mn in FY13 driven by 14% of volume growth and 2% improvement in average realization. The company’s continuous thirst to invest in S&M would put some pressure on margins but scale, broadening employee pyramid and higher utilization would help to absorb that pressure. Overall operating margin is expected to remain stable in FY13. At the current market price of Rs 1177, the stock is trading at 18x of FY13E EPS of Rs 63.36. We upgrade our recommendation from Neutral To Hold with a target price of Rs 1270 after discounting FY13 EPS by 20x,” says Way2Wealth research report.

Public holding more than 90% in Indian cos

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